Monday, February 6, 2012

Europe crisis: don't believe the hype about what it means to the US

Washington Post blogger Ezra Klein's morning missive was titled "Obama's Fresh Lead Vulnerable to Europe's Woes," and in it he notes that a Greek debt default would have "untold, but clearly disastrous, consequences for both Europe and the United States." I'm not sure I see it. Maybe we shouldn't leave these consequences as "untold" before we declare them to be "clearly disastrous." To me, the likely fallout doesn't necessarily rise to the level of disaster.

For one thing, according to the EU Trade Commission, in 2010 US exports to the 27 EU nations represented less than 3% of US GDP. Moreover, most of this business is with the stronger nations, like Germany, the Netherlands, and France. Another concern might be that a euro currency collapse would hurt our exports overall, as it would make our products relatively more expensive than European ones, but even still, with all exports representing less than 13% of US GDP in 2010, it would have to be a massive devaluation to really hurt us. This is also an unlikely scenario - for example, if Greece goes down, it's more likely to be booted out of the euro currency altogether rather than degrade it.

To be sure, the crisis in Europe can't be good for us, and their handling of it doesn't give me confidence that it'll be resolved cleanly, but it's far from a no-brainer that it would spark a crisis here. My analysis is admittedly simplistic, but until someone smarter than me takes the time to really think this through we won't have a clear idea until it actually hits the fan. So perhaps the most significant impact is that it's just more bad news that gets amplified by the media and scares people. In other words, maybe the problem here isn't so much that Greece can't pay its bills, it's that too many journalists are taking shortcuts.

UPDATE: 12 hours after this was published, Klein came clean:

"Since I've written many, many Wonkbooks on the threat that Europe poses to America's recovery, it's worth pointing out that there is an increasing number of smart observers downgrading -- if not entirely dismissing -- the continent's importance to the American economy."

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